1950s Economics


Section 1: Social Conditions / Concerns

Section 2: Political Conditions / Concerns

Section 3: Economic Conditions / Concerns

ISLM Model


Section 1: Social Conditions / Concerns

The 1950s socially was an exciting and eventful time to be alive. During the 1950s was when most of the now known "baby boomers" were growing up. On the homefront, many things began to change during the 1950s. During the forties, many men were across the ocean fighting in WWII, and women began to work, supporting their families and building careers for themselves. Throughout the 1950s both unemployment and inflation remained low. At this time, though the war was over, many women kept their careers. This is evident by the constant increase in the female employment data compiled in the Economic Report of the President. From 1950 to 1959, the total number of females employed increased by 18%. The standard of living during the fifties also steadily rose. Most people expected to own a car and a house, and believed that life for their children would be even better.

Americans during the 1950s were on the move. The population was shifting from the country to the city, then to the suburbs. More people moved from the Northeast and Midwestern sections of the country to the West and the South. Each year, one out of every five families packed up and left for somewhere else. (Chalmers, p. 5) One of the keys to the shift from the city to the suburb was the ease of home ownership through the Veterans Administration and Federal Housing Administration mortgages. More people were beginning families, and having a family meant moving from a one bedroom apartment to owning a house. The mortgages mentioned made purchasing a home easier than ever before. The increase in population was historic during the 1950s--it soared by 28 million; this increase was not from a decrease in the mortality rate of Americans, but the birth rate at the time--which exemplifies the fact that more and more younger couples were beginning to start families.

Also, during the 1950s, the number of college students doubled. Getting a college education was no longer for the rich or elite. College in America turned into a mass higher education system that became a consumer necessity. Partially, this is due to the creation of the GI Bill of Rights, along with the increase in the standard of living for Americans at the time, which made the cost of a college education more reasonable and easier to afford. The United States was on the brink of a major civil rights movement in the 1950s. The Supreme Court ruling in Brown versus the Topeka Board of Education was to desegregate America's school system. Martin Luther King began to move into the forefront of the civil rights movement leading the 1955 boycott of city buses in Montgomery, Alabama for over 50 weeks. Despite the Supreme Court ruling for the desegregation of schools, in 1957, Federal Troops were required to be present to enforce the integration of Little Rock High School in Little Rock, Arkansas. President Eisenhower spoke all about how important it was for white America to treat the blacks as equal human beings, giving them the same opportunities; however, Eisenhower's actions stated the exact opposite. This quote, taken from a 1958 speech that Eisenhower gave to a group of black leaders, sums up the President's approach towards the civil rights movement: "No one is more anxious than I am to see Negroes receive first-class citizenship in this country, but you must be patient."(Pach Jr and Richardson, p. 137.) There was much to be desired from the outcome of the civil rights movement during President Eisenhower's term in office. During the 1950s, the arms race began. The Soviet Union was able to test their own atomic device, which created mass suspicion in the United States. Senator Joseph McCarthy's charges of disloyalty spread across the headlines of newspapers around the United States. This anti-Communist hysteria was commonly known as the Red Scare. The mentality of America during the fifties was one of domestic pride and optimism, international dominance, yet underlaid with suspicion. Nobody could predict what the outcome would be in the United States/Soviet Union confrontation. In 1950, containment would become the official policy of the United States when President Truman approved NSC-68, a recommendation from the National Security Council which provided for worldwide American action against Soviet expansion and influence. The decade of the fifties was a decade of major breakthroughs in technology. James Watson and Francis Crick won the Nobel Prize for decoding the molecular structure of DNA. Tuberculosis had all but disappeared, and Jonas Salk's vaccine was wiping out polio in the United States.(Chalmers, p. 3)

Then came the television. That funny looking box that had moving pictures and sound. In 1951, 1.5 million TV sets were sold in the United States, ten times what it was in 1950. Any family that had a TV in the house was by far the most popular house on the block. In the same year of 1951, color television was introduced, but programs were not regularly broadcast in color until 1954. While we in the 1990s can find a color TV for as little as $150, the first color TV that was built by Westinghouse in 1954 cost $1,100 - and that was without a remote!! Shows like I Love Lucy and The Honeymooners made people laugh. Dragnet, the Twilight Zone and Superman were the popular drama shows at the time, while the kids loved to watch Howdy Doody and aspired to become members of The Mickey Mouse Club. While the television was seen as being great for entertainment and relaxation purposes, it was in the 1950s that America would soon discover the true power of the television through its ability to deliver news.

The relationship between the television and the viewing public was much more than merely passive. The media practically forced images into the minds and brought out emotions of its viewers. The media spread the news while it was happening. This was much different than the radio, which could only deliver sound to the public. The television brought pictures of events and happenings right into the home, showing the public exactly what was taking place. Television became the leader. Any cause or movement that wanted to be known would have to be on television. It came to the point that the media preempted any group's efforts to develop goals and ideology or to recruit members. The images on the television would forever create and shape America's view and knowledge of the world.

The decade of the fifties is largely known for its impact in regards to the younger generation of the time. The teenagers of the fifties had gone through the war not really knowing much about it, yet they had to deal with the results of WWII. They dealt with the high anxiety from the Red Scare and the threat of nuclear holocaust. The "beats," as they were known, set aside the popular social conventions of the time and embraced different cultures and ways of life. This generation of young people provided America with alternatives; from this group, some of the most extraordinary art forms of the 20th century were brought out. Literature in the fifties did not include books based on the ever-popular social concerns. Rather, the focus was on the individual and his/her search for identity and self. JD Salinger's Catcher in the Rye and Sloan Wilson's The Man in the Grey Flannel Suit were among the greatest pieces of literature that came from the 1950s.

Rock and roll became famous in the 1950s. During the earlier part of the decade, feel good music was prevalent. This kind of music was popular, for it reflected the mood that post-war America was in at the time. This feel good music didn't exactly appeal to the teenagers of the time; they found it to be boring and unexciting. This boredom with mom and dad's music spawned a complete musical revolution in the United States, of which the outcome would be rock and roll. In 1954, Alan Freed, a Cleveland DJ began to play black R&B music. He then moved to New York, and had performers play live. He termed this black rhythm and blues style to be 'rock and roll.' The problem was that most of the black artists who sang rock and roll music weren't considered to be marketable at the time. White musicians who did covers of the black songs sold more records and became more popular, although the covers sounded much worse than the original black performed versions. What rock and roll needed was a singer/musician who could play the music with the energy and determination that the blacks did, yet was marketable and could sell records like the whites. Sam Phillips, who founded the first place a black musician could record, the Memphis Recording Service, found the perfect individual: Elvis Presley. From then on, groups like Bill Haley and the Comets, among others, began to enjoy success in the rock and roll industry. While many different types of music came and went throughout the first 4 decades of the 1900s, rock and roll came in the 1950s and has stayed in America ever since.

Section 2: Political Conditions / Concerns

The issue in the 1950s was not civil rights as the nation moved from the domestic-oriented politics of the 30s and 40s to a new politics centered on communism, corruption, and Korea. Though all surrounding social and economic impetus played an integral role in shaping the political arena of the fifties, the underlying theme seemed to be the United StatesÕ need for continued domination in the industrialized world. The public thus concerned itself with issues of national security, and the administrations of Truman and Eisenhower based most of its policy formation on taking the [questionably] necessary steps to assure the public that America would remain dominant and purely democratic.

Harry S. Truman, elected president in 1945, identified three objectives following World War II, incorporating the solutions of the Truman Doctrine, the Marshall Plan, and NATO. In 1947 as the Soviet Union pressured Turkey and, through guerrillas, threatened to take over Greece, he asked Congress to aid the two countries, enunciating the program that bears his name. The Marshall Plan, named for his Secretary of State, stimulated spectacular economic recovery in war-torn western Europe; Americans believed that the Plan thwarted communist victories in Italy and France. When the Russians blockaded the western sectors of Berlin in 1948, Truman created a massive airlift to supply Berliners until the Russians backed down. Meanwhile, he was negotiating a military alliance to protect Western nations, known as the North Atlantic Treaty Organization (NATO), which was depicted as a diplomatic deterrence to Soviet expansion (www.whitehouse). All three plans furthered a common goal: to stop the spread of communism. This militant anti-Soviet policy peaked in the incipiency of his presidency; however, the three objectives were intimately linked in the peace and prosperity concept, which explained containment and provided its rationale. Thus, AmericaÕs foreign policy leading into the fifties was derived from the goals of its domestic policy.

In June 1950, when the communist government of North Korea attacked South Korea, Truman conferred promptly with his military advisors to conclude that there was complete, almost unspoken acceptance on the part of everyone that whatever had to be done to meet this aggression had to be done. There was no suggestion from anyone that with the United Nations or the United States could back away from it. (www.whitehouse). After the defeat in the House of the Korean Aid Bill in January 1950, the administration warned that failure to help Korea would inevitably lead to a future war in less advantageous circumstances, an idea that became the main thrust of administration policy rhetoric for the remainder of Truman's presidency. Truman committed American armed forces in June 1950, and a long, discouraging struggle ensued as U.N. forces held a line above the old boundary of South Korea. Truman kept the war limited in order to avoid a major conflict with China and perhaps Russia, presenting the conflict as international aggression, not the civil war it appeared at face value.

On the domestic front, Truman's loyalty program altered national priorities by heightening security issues. The program allowed for the review of the political beliefs and associations of federal employees, establishing a Loyalty Review Board to carry out these practices. Ultimately, it lent legitimacy to the future McCarthyism practices by inducing paranoia without foundation (Bernstein 263). In addition, Truman's commitment to a course of military deterrence -- the development of a thermonuclear bomb -- utilized the argument of defense rather than aggression or proaction, an inadequate disguise for inducing the Cold War.

General Dwight D. Eisenhower took office in 1953 with the knowledge that his new title would serve to reinforce beliefs obtained from his military career: the importance of teamwork, the need for clear lines of authority, and the abhorrence of partisanship. EisenhowerÕs ideas recalled those of Herbert Hoover, who during the 1920s extolled the virtues of a corporate economy and declared that the federal government should concentrate on promoting cooperation among private interests for the common good. However, it is evident through his policies that Ike himself was not a Ònon-partisan;Ó rather, his philosophy of government tended to favor the status quo.

One of the most pressing concerns on the international front was the stalemate of the Korean War; so pressing, in fact, that Eisenhower began brainstorming solutions before taking office. On July 27, 1953, the United States and North Korea signed an armistice at Panmunjon, a solution to the oppositionÕs prisoner of war situation, though not a victory for the U.S. per se. The 38th parallel was thus established as the boundary between North and South Korea (www.sunsite).

Perhaps the most notable issue of the Eisenhower years was the one that consumed the nation in all respects. The hysteria over Communist subversion within America, though building throughout the years of TrumanÕs militant anti-Soviet policy, came to be known as McCarthyism. Since the beginning of the Cold War, fear of spies, saboteurs, and security risks had been mounting with each investigation by the House Un-American Activities Committee or arrest by the FBI, and Republican Senator Joseph R. McCarthy promulgated the country's suspicions and fears by accusing the Department of State of knowingly harboring Communists as federal employees. Although he had no diplomatic credentials, McCarthy negotiated an agreement with Greek shipowners about trade with Communist China, conducted a search for spies in the Signal Corps and the Fort Monmouth laboratories, and investigated the Voice of America and overseas information programs of the State Department All inquiries were performed with destructive roughness, aided by federal employees who violated their trusts by supplying him with information about their collegues and superiors (Latham x). Though the country appeared to mobilize as a mass unit behind McCarthyÕs unfounded accusations, EisenhowerÕs inability to do more than criticize the Senator (often even refusing to use his name) signaled to some to be an indication of approval, and the PresidentÕs credibility fell, even as McCarthy became something of a demagogue.

Though McCarthyism was a sensationalized and unfounded theory, the Cold War still remained very much a top priority of the Eisenhower administration. In his first state of the union address, Eisenhower commented on the Òworld of turmoilÓ created by Òthe calculated pressures of communismÓ (Pach 75). Not only did this statement provide the insight into his foreign stance, but into his Cold War strategy as well. In order to meet the Soviet threat without endangering the health of the economy, Eisenhower relied heavily on the build-up of nuclear weaponry, hoping that the threat of nuclear devastation would be sufficient to ward off the spread of Communism. On July 18, 1955, Eisenhower unveiled his ÒOpen SkiesÓ policy, suggesting that the two nations should open up the skies for aerial inspections, exchange charts of all military facilities, and agree on rules for conducting surveillance flights (Pach 112) The Soviets regarded the policy as an attempt at espionage, and no agreement was achieved.

On October 4, 1957, the Soviet Union launched the first earth satellite, Sputnik, into orbit. Such a momentous technological advancement invited speculation that the United States had suffered a devastating blow to national security, as America had prided itself on being ahead of the "technologically-backward" Soviets (Pach 170). Though Eisenhower did not give top priority to beating the Russians to space, national anxiety prompted an increase in space research, and the first U.S. satellite, Explorer I, was sent into orbit on January 31, 1958. On July 29, 1958, Eisenhower signed a bill creating the National Aeronautics and Space Administration (NASA), despite his reluctance to relinquish the Pentagon's control over space research and instruction, and his casual attitude toward the Soviet's accomplishments(www.sunsite).

Likewise, the theme woven throughout the fifties pervaded foreign policy as well. Whenever conflict abroad was assessed as a potential spreading of the Communist disease, the United States was committed to defeating the faction that induced it, as was the involvement of troops in Korea. Third World nationalism inspired the confusion resulting from existing relationships and created new opportunities for Communists to further the aims of world revolution (Pach 87). Nationalist Leftist Premier Mohammed Mossadegh was ousted and replaced with a regime loyal to Shah Pahlevi. Later, Iran and surrounding countries signed an anti-Communist alliance known as the Baghdad Pact, under the encouragement of the United States. In Latin America, the United States concentrated on developing support for its Cold War policies, securing nations cooperation in collective defense against external aggression, and eliminating internal Communist or other anti-U.S. subversion (Pach 90).

The most notable event of Eisenhower's last weeks in office seemed to sum up the 1950s and warn against the trend of the future, the dangers of a garrison state. "The conjunction of an immense military establishment and a large arms industry is new in the American experience. In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist" (Pach 230). Fearful that the military-industrial complex was developing an enormous power to absorb national resources, Eisenhower issued one last warning. "As we peer into society's future, we -- you and I, and our government -- must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow". In retrospect, the words of the President demonstrated extreme insight into the future of America, as the Cold War continued with increasing urgency, and Vietnam tore the nation apart.

Section 3: Economic Conditions / Concerns

Economically speaking, the 1950's was a relatively stale period of time, that is, compared to the 30's and the 40's. The 1950's, being an uneventful period, explains why the economy did not experience any major problems or breakthroughs. However, this gradual growth led to the US being at peak economic strength in the early 1960's. There were also a significant number of occurences and trends that were important both during this decade and as a contributor to future events.

Inflation was an important issue during the 1950s because of two major waves of inflationary conditions swept the country at this time. The first followed the end of World War II and the second at the onset of the Korean War in 1950. Post World War II America waited expectantly for the United States to suffer a postwar economic collapse. The recession came in the third quarter of 1948 and lasted until the second quarter of 1950 (Vatter,121).

The causes of this inflation are not fully understood. Slow economic growth and slow increases in the money supply are considered the most probable culprits. At this time the money supply rose much more slowly than the Gross National Product. When the GNP rose significantly from 1955-1960 it was accompanied by an increase in the velocity of money, however, the quantity of money did not keep in step with these changes. This led to a significant ratio change between the GNP and the money supply. The increase in velocity of money due to this discrepancy is the most important component of the inflationary trends during this decade. Gross National Product rose from $211 billion in 1944 to $329 billion in 1951, but measured in 1960 dollars of equal purchasing power, the rise was only from $373 billion in 1944 to $391 billion in 1951. Furthermore, the GNP growth rate (in constant dollars) was slower than many other industrialized areas, such as Japan and Taiwan (Vatter, 124). This difference might have been a beginning for the current large productivity gap between the US and these countries. The foreign balance of trade took its first major dive during this decade and for twelve of the thirteen years between 1950 and 1963, the US had a negative balance of trade. This was a primarily new occurrence for the US economy as it was the main economic powerhouse in the world previous to this time and did not have to rely on imports to be self-sustaining. This balance of trade led to $8 billion dollars of gold leaving the hands of the US government during this period of thirteen years and may have paved the way for our current deficit situation (Vatter, 264).

Consumer prices increased significantly over this decade due to a number of factors. The first of which was the slow growth of productivity in the US economy at the time especially in the service sector. The service sector experienced the biggest price increases due to lapses following the removal of price controls following W.W.II. The Federal Reserve's policy, which will be covered in greater detail in the next paragraph, was another factor. The Federal Reserve Bank set policies that were used to try to limit the economy to diving into only mild recessions instead of large economic declines. Large increases in consumer demand and credit were also factors in the increase of consumer prices due to corresponding poor productivity of the industrial sector. Huge increases in indirect business taxes and social security taxes also played a role as both nearly doubled during the decade.

The Federal Reserve Board also had an important role in the inflationary conditions of the 1950s. The policy of the Federal Reserve Board relied upon the general quantitative devices of credit control -- the discount rate, open market operations, and changes in the reserve ratios. Following the end of the Korean War in 1953 the Board was obsessed with the fear of inflation and also of the fear of utilizing too much control. The Board used the quantitative devices at a vigorous pace in response to a number of recessions and economic downturns in hopes of maintaining stable prices in the economy (Vatter, 129). The Board has been criticized for their policies and actions during this time, but it is reasonably accepted that the price rises would have been significantly larger had they not intervened.

Eisenhower's views on political economy in many ways coincided with Truman's, for both insisted that government attempt to promote economic growth, although Truman was more likely to use federal spending to stimulate a sluggish economy. Both disliked budget deficits because of their concerns about the dangers of inflation.

One of the basic principals of the Eisenhower administration was fiscal responsibility; that is, the government has a duty to stimulate economic growth and raise productivity without benefiting any one special interest. Moreover, he was relentless in emphasizing the belief that an unbalanced budget promoted inflation, which increased domestic problems and weakened national defense. Prosperity was unattainable at the sacrifice of wage and price stability.

A commitment to classical budget principles was adopted by the Federal government in an attempt to reduce the size of the Federal budget, improve operating efficiency of departments, and to reduce waste. A reliance was put on private investment in the belief that economic growth would therefore take care of itself. Government expenditures on military and defense declined slightly following the end of the Korean War and those funds were redirected into highway and airport grants as well as into social welfare programs. The expanding role of government in the economy led to huge increases in taxes, especially income taxes, and a corresponding increase in the amounts of services that the Government was providing. Tax rates continued to climb during this period as the government needed ever increasing funding to finance new activities.

By the end of 1953, Eisenhower faced a lagging economy as a result of the Korean armistice's sharp military cutbacks. A mild recession reached its peak in January 1954 with unemployment rates topping out over 6 percent. Eisenhower's first order of business was to ask Congress to curb the growth of federal spending. His budget for 1954 reduced Truman's proposed expenditures of $79 billion by $5 billion and cut the projected deficit of nearly $10 billion in half. In April, he approved a revised request for new appropriations of nearly $63.2 billion, with the largest reduction coming, ironically, in national security programs. Putting a balanced budget above defense prevailed because Ike insisted that the real issue was the long-term security of the U.S., to survive. In fiscal year 1955, he cut the defense budget by another $5 billion.

There were also a number of other developments in the business sector in the capital markets and other financial intermediaries during the 1950s. Over the decade the housing supply increased 27 percent and the overall quality level of aggregate US housing increased dramatically. A move from urban areas to suburbs was the predominate characteristic of the new construction and increasing health and living conditions quality characterized the urban growth (Barach, 57).

With the great surge in construction and industrial investment as well as with consumer credit reaching previously unattained levels the economy seemed to be booming. The bond market reacted accordingly and it surged over the decade in step with the economy. The average yield in 1950 was 2.86 percent compared to the 4.73 percent average yield in 1960. This increase in bond prices and corresponding decrease in the stock market ( below the averages of all classes of bonds in 1958) was the result of the Federal government's high-interest-rate policy.

Growth in the economy also led to increasing popularity of other financial intermediaries. Life insurance companies flourished for the first half of the decade and a large number of new private firms entered the market to absorb the excesses of personal savings. Savings and Loan Association holdings of mortgage loans during the decade clearly demonstrate the boom in construction at this time. In 1950 $13.6 billion was held rising to $60.1 billion in 1960. Another important growth in the 1950s capital markets was in pension funds. This industry grew from $11 billion in 1950 to $44 billion in 1960 (Vatter, 195).

By mid- 1955, the country had pulled out of the previous year's recession and gross national product was growing at a rate of 7.6 percent. The boom was so great that the budget for 1956 predicted a surplus of $4.1 billion. With the surges in production and the economy, the 1950s is often recognized as the decade that eliminated poverty for the great majority of Americans. Over the decade, GNP per capita almost doubled and the public welfare reacted accordingly as the cost of living index rose by just 1 percent and unemployment dropped to 4.1 percent (Barach, 90). An average of three million people per year were added during the postwar "Baby Boom". With their rising incomes and increasing public welfare, booms in consumer spending were prevalent and items that had been previously thought of as luxuries were now necessities. Examples of this include fashion clothing, televisions, washing machines, etc. The propensity of the mid-fifties is attributable to the middle-class family striving for the American dream through increasing their number of material possessions.

In fiscal year 1958, Eisenhower's budget of $73.3 billion sparked debate because it marked an increase of $2.8 billion over the previous fiscal year, despite analysts' predictions of a slight surplus. A Battle of the Budget ensued over the highest expenditure proposal in peacetime, with fears of an upcoming depression if spending continued at current levels. Eventually, Congress provided Eisenhower with $4 billion less than he had requested.

The economy turned sharply downward in the summer of 1957 and reached its low point in spring 1958. Industrial production fell 14 percent, corporate profits plummeted 25 percent, and unemployment rose to 7.5 percent (Vatter,115). The president did little to stimulate the economy because he worried about inflation - not unemployment - as the real danger. Subsequently, fiscal year 1959 realized a $12 billion deficit, a new record for a budget shortfall during peacetime.

ISLM Model

In order to calibrate the macro-economy models to the 1950Õs we utilized actual data from the decade as obtained from The Economic Report of the President ; created defining formulas based on the components flowing into another component; adjusted arbitrary constants, and compared the graphs to the actual trend of the economy.

The defining segment of our model is that which demonstrates the balance of the fiftiesÕ economy by equating aggregate production with aggregate expenditures. The stock, inventory, is equated with desired inventory initially because when the model is running in equilibrium, the flow out of aggregate production is the same as the flow into aggregate production; hence, both numbers have initial values of 5000. Aggregate expenditures is a measure of all outflows from inventory, a function made up of consumption, government spending, net exports, and investment. The government spending and net exports components consist of a graph over time, with links pasted from an Excel spreadsheet containing the actual raw data for the variables. Investment is a function of the interest rate effect; in order to appropriately model this in accordance with our decade we first modeled the interest rate (detailed later in this discussion), and then created a graph plotting the interest rate over another variable entitled the effect of the interest rate on investment . We estimated the values of each, shaping the graph under the assumption that as the interest rate rises, the effect on investment will decrease. Thus, we graphed investment with the effect of the interest rate, implementing a delay function because of the time lag between the change in the interest rate and the resulting change in investment. In addition, .............................................. Consumption is a function of autonomous consumption plus the marginal propensity to consume times income (Co + mpc * Y). For our purposes, autonomous consumption is defined as consumption regardless of income; this variable consists of actual data graphed over time. We arbitrarily chose the mpc at .75 because of its closeness to reality; however, we changed this estimate to .70 in order to better coordinate our efforts to get the model into equilibrium after all other flows and stocks were calculated. Income is equal to the other biflow, aggregate production, ad is thus the tying link in the circular model.

In order to complete the circular macro model, we also calibrated the money supply to the 1950Õs. Money supply is the stock equal to the initial value of the money supply plus the changes in the money supply, a biflow into the stock. We set the initial value of the money supply at 155.6, a value based on actual raw data from the Economic Report of the President. By calculating the differences in the money supply data for each year, we pasted an Excel link and graphed the changes in the money supply over time. Money demand is a function of income, with a constant to represent the autonomous money demand. The effect of income on money demand represents the fifties with a value of 0.5, demonstrating a median, yet rather significant power of rising income to produce an increase in money demand. Hence, money demand equals 500 (an arbitrary constant) plus income (as previously defined) times the effect of income on money demand. Lastly, the money supply model influences the interest rate, which in turn is a determinant in the aggregate production and expenditure model. Both money supply and money demand flow into the interest rate, which is a graph of the ratio of money demand to money supply. We shaped the graph to demonstrate that as money demand rises relative to money supply, the interest rate also rises. In addition, when money demand equals money supply, the interest rate is presumed at its natural rate for the decade, about 5%. We also compared the range of the interest rate values relative to the money demand/money supply range in order to better calibrate the numbers to mirror actual 1950Õs data.

The last section of our macro-ISLM model is important in deriving the Phillips curve, a tool demonstrating the effect of unemployment on inflation. Initially, we attempted to model this effect using labor productivity data (GDP/ # of employees) times fully-employed labor force (labor force * .95, assuming a natural rate of unemployment at 5%) to equal potential income. However, when the data produced a graph plotting potential income far below income when the model was in equilibrium, we adopted a simpler version, with unemployment composed of potential income and income. Potential income is a graph over time with values chosen in order to show that as unemployment is at the natural rate of 5%, it is equal to actual income; when unemployment is lower than the natural rate, we used values below actual income; values higher than actual income represented unemployment rates higher than the natural rate. Unemployment is a graph of income over potential income, which we shaped according to the above reasoning, with the unemployment rate at 5% when YA/YP equals 1. Finally, we derived the Phillips curve by graphing inflation over unemployment; as unemployment increases, inflation decreases. Though we learned that the long-run Phillips curve is vertical, we shaped the graph to imply an inverse relationship based on the assumption that unemployed persons lack full information about all the prices in the economy. Though we did not plot points using the data we obtained on the fiftiesÕ inflation rate, we did compare the numbers to the corresponding unemployment values in order to closely correlate the relationship while shaping the slope of the line. The end of the model is the stock of prices, defined as initial price plus inflation. For our purposes, we did not go further with this component, but the effect of inflation on prices is to force an increase whose degree depends on the rate of inflation, and likewise influences consumption and related economic determinants.

Subsequent to achieving equilibrium with our macro-model, we tested various economic policies in order to determine which one or combination may have had a more positive effect than did those chosen by policymakers in the 1950Õs. The first policy tool we implemented was an expansionary monetary policy. Eisenhower worried most about inflation, not unemployment, and thus did little to stimulate the economy when it realized a sharp downturn in the summer of 1957, reaching its low point in the spring of 1958. In order to test its effect we increased the money supply using the delay built-in for the change in money supply biflow. The delay effect is useful to test the expansionary policy mainly for the second half of the decade, when it may have been possible to avert the recession not brought on by post-war factors. This increase in money supply lowers the interest rate,......... investment.............. The unemployment rate increase accompanying a recession would be lowered in the short run, and inflation would increase. By isolating this form of expansionary monetary policy, we determined that it is an appropriate tool for driving down unemployment, but as formerly-unemployed persons gain complete information about the price increase resulting from inflation, they may choose to leave the work force. Essentially, the foresight needed to successfully utilize the Phillips curve to avoid the 1957-1958 recession would probably create inflationary problems leading into the sixties akin to those created by the policies of Reaganomics. After returning our model to equilibrium, we decided to increase net exports. Though post-war recessions are expected, inevitable consequences of wartime production, the third quarter 1948 recession lasted through mid-1950. A 26% decrease in exports was deemed the main culprit, so we increased the data for the 1950 value of net exports to a value closer to that in prosperous 1955. The result................................................................................................... Our third policy test had an effect similar to that of the aforementioned, as both government spending and net exports are flows into aggregate expenditures. As Eisenhower promoted fiscal responsiblity, he attempted to stimulate economic growth and raise productivity without creating an unbalanced budget. Again returning to his concern of inflation, he believed that prosperity was unattainable without stable prices, and he asked Congress to curb the growth of federal spending. Yet as the most critical economic problem of late 1953 was a sluggish economy, perhaps the more appropriate thing to do would be to increase government spending .................


Bernstein, Barton J. Politics and Policies of the Truman Administration. Chicago: Quadrangle Books, 1970.

Barach, Arnold B. USA and its Economic Future. New York, Macmillan Company, 1964.

Chalmers, David, And the Crooked Places Made Straight Baltimore: The Johns Hopkins University Press, 1991.

Latham, Earl. The Meaning of McCarthyism. Lexington: DC Heath and Company, 1973.

Meyerowitz, Joanne, Not June Cleaver Philadelphia: Temple University Press, 1994.

Pach, Chester J. and Richardson, Elmo. The Presidency of Dwight D. Eisenhower Kansas: University of Kansas Press, 1991.

Vatter, Harold G. The U.S. Economy in the 1950Õs. Westport, Connecticut: Greenwood Press, 1963.





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